Keeping away from emergency situations

The recent fire at the SkyCity Auckland Convention Centre (Convention Centre) caught much media attention, in part because the fire released potentially toxic smoke that caused the surrounding parts of the CBD to shut down. This disruption raised questions about the rights and obligations of owners and occupiers of buildings when a property is not itself damaged, but cannot be safely occupied because of a nearby emergency.

We look at how commercial leases can address these issues upfront to ensure that if a nearby emergency occurs the landlord and tenant have agreed terms and processes to follow.

The key areas that landlords and tenants need to consider include:

  • health and safety duties
  • identifying emergency situations that the parties agree will give rise to a tenant rent abatement and if protracted, a termination right (no-access in an emergency clauses)
  • insurance to cover business interruption and/or payment of rent when the property cannot be accessed

Health and safety duties are paramount

Both tenants and landlords have duties under the Health and Safety at Work Act 2015 as a “person in control of a business or undertaking”.  These duties include ensuring they consult, co-operate, and co-ordinate with each other to the extent reasonably practicable to ensure the health and safety of a building’s occupants. Where an event gives rise to a risk to the health and safety of a building’s occupants, landlords and tenants should consider whether it is necessary to evacuate the building to comply with their health and safety duties.

A number of businesses in Auckland’s CBD chose to evacuate their offices for a day or more due to the smoke from the fire at the Convention Centre.  Like our own, those businesses will have formed the view that evacuation was the appropriate course of action for the health, safety and well-being of their staff.  Complying with health and safety duties is paramount at all times and an emergency situation often brings increased scrutiny to compliance.

Despite the emergency situation and the paramountcy of health and safety, these businesses may still have to pay rent for the evacuation days under the terms of their leases. Whether or not the obligations to pay rent and opex continue to apply will depend on the provisions of the relevant leases, and specifically how the risk has been allocated between landlord and tenant in the negotiation of the “no access in an emergency” clauses.

No access in an emergency clauses may give a tenant rent relief

Many common forms of lease, such as the current version of the Auckland District Law Society Deed of Lease, now have provisions that deal with “no access in an emergency”. These types of clauses typically relate to major events that:

  • endanger the safety of public or property
  • are not under the control of the landlord or tenant
  • result in the property being included in prohibited or restricted-access cordons (even where the property itself is not directly affected or damaged)

These clauses often provide the tenant with an abatement of “a fair proportion” of rent and outgoings for the entire period of no access. The provisions do not usually specify how “a fair proportion” is to be calculated, however in practice it depends on how much, and for how long, the property cannot be accessed.

These provisions also commonly include termination rights for continuing lack of access that exceeds an agreed length of time.

Tenants should be aware that not all leases include no access provisions, so they should be on the look out when negotiating new leases.

Many of the businesses that decided to evacuate their offices during the fire at the Convention Centre were adversely affected by the smoke, but were not within a prohibited or restricted-access cordon area and as such may find that the “no access in an emergency” clauses in their respective leases are not helpful (if indeed their leases have such clauses).

Parties can insure to cover the cost of interruption

Landlords and tenants also have various insurance options available to ensure that they are financially protected if an emergency or major disturbance interferes with the tenant’s occupation of the property:

  • Tenants can obtain a “business interruption” insurance policy that covers rent (amongst other expenses) should an emergency arise that affects business operations.
  • Landlords can obtain landlord’s rental interruption insurance, so that if a tenant is entitled to a rent abatement due to an emergency or major disturbance, the landlord will still be able to rely on an income stream during the period of disruption.

Even if the risk of interruption is low, the consequential cost or effect of interruption can be significant, meaning most prudent landlords and tenants use rental or business interruption insurance.  While the period of disruption was reasonably short for most businesses that were indirectly affected by the smoke from the fire at the Convention Centre, it is a salient reminder that there are risks outside of the control of both the landlord and the tenant that can affect the occupation of a building.  Insurance is often a prudent way of mitigating the cost to a business of unexpected events.

Insurance policy terms vary between providers and policies and are instrumental in dictating whether cover is available in any given situation.  Landlords and tenants should both carefully consider, and discuss with their brokers, what their respective insurance policies specify as the triggering event (e.g. is damage to the property required?) and what the period of cover is.

Extended business interruption insurance is often expensive and so the duration of cover is usually limited, which makes the terms of leases all the more important in the event of protracted evacuation periods caused by nearby emergencies.

We can help

The recent fire at the Convention Centre has shown that accidents can and do happen – even where you wouldn’t expect them. Whether you are a landlord or tenant, receiving the right advice can ensure that your business is protected by planning around what happens if an event like this occurs at, or near, your property.

Our property team has extensive experience with drafting and negotiating clauses dealing with emergencies and major disturbances.

If you are entering into a new lease as a landlord or tenant, or need some advice regarding a lease you already have, we would be delighted to help.

Who can help